Ready Or Not?

Before you start shaking the trees for investors, make sure you're prepared to catch them.
Magazine Contributor
9 min read

This story appears in the August 1999 issue of Business Start-Ups magazine. Subscribe »

If the purest excitement in business is that rare, big-sky idea, then *CD (pronounced "star CD") has enough firepower to light up even the most skeptical investor. The premise is simple: Allow consumers to immediately buy the music that's playing on their radio by dialing *CD on their cell phone. With one phone call, the service identifies the song, artist's name and CD title--it even plays samples of other songs from the same CD. If you like what you hear, you can buy it immediately by charging it to your cell phone bill or credit card.

It's this big idea that has George Searle, 35, and Humphrey Chen, 31, working 14 hours a day building Berwyn, Pennsylvania-based ConneXus Corp., the developer of *CD. The idea itself is more than enough to excite investors. But the partners' pedigree adds even more appeal: Both have Harvard MBAs and wrote their business plan while in B-School.

Even so, the pair's initial pitch fell short with angel investors. On graduation day, 1996, the partners watched as classmates left Harvard for six-figure jobs. Without funding, Searle returned with his wife and children to his family's farm in Indiana. Chen stayed on the East Coast, in West Orange, New Jersey, closer to the money that would eventually give life to their dream.

After tweaking their business plan, the pair worked a contact at Harvard into a meeting with Burr, Egan, Deleage & Co., the large Boston-based venture capital firm. The million dollars the partners sought was hardly worth the firm's bother. But the power of the idea, coupled with Searle and Chen's earnestness, convinced the firm to take a leap.

The initial equity injection was enough for the partners to secure a venture lease on the computers and technology needed to pull off their *CD concept. A second round of venture capital has since been poured into the business, which now counts giant Comcast Cellular as a strategic partner. Plans call for *CD to be rolled out in major metropolitan markets nationwide by year-end.

But the money-raising hasn't ended. In fact, it's just started. "It takes constant work to attract the capital required for a national launch," says Searle. "We're always refining ourselves and how we present the opportunity in order to find partners willing to fund our growth."

For companies like ConneXus, raising money from venture capitalists, or, for that matter, from angels and investment bankers, generally happens in four steps: identifying prospects, preparing to contact them, contacting them and closing them. According to Paul Rosenbaum, a managing partner with CEO-mentoring and capital-assistance firm Wayland Partners in Wayland, Massachusetts, and a former general partner of American Research and Development, one of the country's first venture capital firms, "What frequently goes wrong in the process is entrepreneurs jump from step one to step three." Without proper groundwork, he says, their efforts are often for naught. What follows is a primer on getting everything ready to begin dialing for dollars.

1. Sharpen your focus. First and foremost, you must set your sights on finding what is called a lead investor. When you're raising money, you can find lots of investors willing to participate for small amounts of your deal. That will ultimately prove troublesome, however, because each investor will demand different terms and conditions, and in the end, the entire effort may consume more time than it's worth. By contrast, a lead investor is a marquee venture firm, investment banker or angel investor that's willing to kick in from 25 to 100 percent of the raise, i.e. real money, and that, by its very presence in the deal, gets all the fence-sitters and small fry to come in as well. When you're raising money, you must focus on finding your lead investor to the exclusion of any others.

2. Form an advisory board. A good strategy for tapping into the right vein of investors is to form an advisory board that contains industry or financial luminaries. Not sure where to look? Contact the executive director of your trade association, and ask him or her who might be willing candidates to advise and counsel your company through a critical period of growth and expansion.

Advisory boards can be toothless entities, or they can be extremely helpful to a company's development. One way to make them work better is to pay your advisory board members a fee for attending quarterly meetings. Once you've got them paying attention in a constructive manner, you'll find it's a very natural process for them to check their Rolodexes when you bring up the subject of raising money.

3. Secure legal counsel. The act of raising money almost always brings securities laws into play, which means you'll require the help of a lawyer. Hire one early in the process because he or she can help make introductions to the sources of capital you seek.

In fact, if you're a hotshot technology or Internet company, some law firms will actually defer their fees until funds are raised, further increasing the likelihood that your attorney will lead you to investors. In the case of Searle and Chen, the partners were fortunate enough to be chosen for a special program operated by Boston-based legal powerhouse Testa Hurwitz & Thibeault LLP. The firm agreed to defer its fees until funding was found for *CD. "They provided us with invaluable legal and business advice up-front for the opportunity to represent us in the future as we grow," says Searle.

4. Figure out your sizzle. Before you speak with investors on the phone or in person, you've got to figure out how to describe your company in a way that will make it stick in their minds. According to Rosenbaum, entrepreneurs are often caught off guard when investors ask what the company does, so they drone on for three minutes about technology or market trends, and just that fast, they've lost the investor forever.

What does Searle say? "We went through a time when we would trip over how to explain our technology. Then we realized that if we simply explained the consumer benefit of our service, investors understood immediately. Now we just say

  • CD lets you immediately buy the music you're hearing on the radio by picking up your cell phone and dialing *CD," says Searle. "If an investor wants to know all the details of the technology, we'll share it with them. But it's not part of our elevator talk."

5. Write a business plan and business-plan summary. You must have a business plan and business-plan summary ready before you call any investors. "If your initial call is at all successful," Rosenbaum says, "the investor will ask you to send him or her a plan." He adds that your fund-raising efforts will almost certainly fail if you keep investors waiting eight weeks while you feverishly write the plan. In fact, when an investor requests more information, it's got to be there the next day--at the latest.

Another reason you must have a business plan before you talk to investors is that you can't possibly hope to answer the kinds of questions they're going to ask until you've been through the exercise of writing a plan. Remember, most investors don't read business plans cover to cover, nor do they invest money on the basis of reading business plans alone. They invest, Rosenbaum says, after they've been formally and personally presented with the company and opportunity. Therefore, your business plan, hardly a literary document, is more accurately the blueprint for presenting your company and your deal to investors.

A final tip about business plans from Rosenbaum: Never send a copy of the entire plan out after the first conversation, even if the investor asks for it. Send the executive summary instead. Then follow up. If the investor is interested, make sending out the full plan contingent upon meeting face to face. And finally, if possible, break out of the 8.5-by-11-inch box and send a product sample along with your plan or summary. Paper gets buried; samples get examined.

6. Line up references. Who can vouch for your character? Former employment? Products or services? The time to find out is before you contact investors, not after. The reason is simple: If, during your initial conversation, the investor asks to speak with customers or other references, you want to be able to spit out names and numbers right away, not say "I'll get back to you." You may be able to get the references sure enough, but the question is, Will you be able to get the investor back on the telephone again?

7. Get warm-body introductions. Raising money privately is probably dependent as much on personal relationships as it is on the underlying economics of the deal. As a result, you might identify a list of likely investors, but before you try to contact any of them, you need to work at getting some kind, any kind, of introduction. This personal introduction will lower their guard long enough for them to hear out your pitch. Again, here's where advisory boards and the professionals you've retained can render invaluable assistance. For *CD, the introduction came from a Harvard professor with an in at a venture capital firm. Obviously, you can't get the Good Housekeeping seal of approval for every investor, but some kind of introduction, no matter how distant, will dramatically increase your ability to get through to the people with money.

None of these strategies will by itself win the day, says Rosenbaum. But falling short on any one of them could very easily lose the day. "All your efforts must be focused on moving the process forward," he says. "If you're being reactive, you're probably not on the right track."

David R. Evanson's newest book about raising capital is called Where to Go When the Bank Says No: Alternatives for Financing Your Business (Bloomberg Press). Call (800) 233-4830 for ordering information. He is a principal of Financial Communications Associates in Ardmore, Pennsylvania.Art Beroff, a principal of Beroff Associates in Howard Beach, New York, helps companies raise capital and go public.

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